The ‘No’ Shutdown

Democrats are standing firm against Republicans who just say “no” to Obamacare, and Republicans are standing firm – more or less – against Democrats who just say “no” to them.

So here we are, entering the second day of a partial shutdown of the federal government, with precious time ticking away before the U.S. Treasury runs out of cash, along with the authority to borrow more of it.

How worried should we be, as Democrats, Republicans or independents – and, more importantly, as Americans?

I’ll take the less sensationalized and, for the moment, the less popular position: In the scheme of problems large and small, the current drama does not loom very large.

Although it has been 17 years since the last time federal spending authority lapsed, there was a time when these partial shutdowns of the federal bureaucracy were fairly common. In fact, some or all arms of the government were forced to cut back their operations a total of 17 times between 1976 and 1996. As The Washington Post reported, citing a Hoover Institution study, some of these lapses were as brief as one day – sometimes even just a weekend day – while others were as seemingly intractable as the current Capitol Hill impasse.

In the autumn of 1977, federal operations were curtailed on three separate occasions for a total of 28 days, in a dispute over which abortions could be covered under Medicaid. (The Post did an excellent job describing the reasons behind all the prior shutdowns; you can read their explanation here.)

Though it may seem strange in today’s intensely partisan climate, the 1977 shutdowns occurred even though Democrats controlled the White House under President Jimmy Carter, as well as both houses of Congress. Abortion was just as highly charged an issue back then as it is today, but it was less partisan. There were pro-choice Republicans and anti-abortion Democrats in Congress. Both (especially pro-choice Republicans) are rarities today.

Exactly 31 years ago, the government reopened after a one-day shutdown that occurred simply because neither President Ronald Reagan nor Congress (with the Senate in GOP hands and the House held by Democrats) got around to passing the legislation necessary to avoid it. On the shutdown’s eve, Reagan had invited all members of Congress to a White House barbecue, and Democrats also held a fund-raiser that conflicted, according to the Post’s history (citing a contemporaneous New York Times account).

The idea that a president might invite all of Congress to the White House for a barbecue, let alone on the eve of a shutdown, does not just sound like another era. In the context of today’s partisan shouting match, it sounds like another country.

The historical theme is that these typically brief, partial shutdowns do not do lasting damage to the economy or to the nation. They may even do some good.

In the 1995-96 imbroglio between Democratic President Bill Clinton and the GOP-led Congress, two separate shutdowns totaled 26 days as the two sides battled over approaches to balance the federal budget within seven years. Ultimately the Republicans, who were generally seen as the public relations losers in that fight, agreed to Clinton’s approach – and the federal budget was in balance when Clinton left office five years later.

But the GOP held its House majority in the 1996 elections that returned Clinton to office for a second term, and Republicans even picked up two additional seats in the Senate. The budget’s good shape at the outset of George W. Bush’s presidency set the stage for two rounds of tax cuts that Republicans, who still controlled Capitol Hill, badly wanted. It is not at all clear that the GOP paid much of a long-term price for the 1995-96 showdown.

Still, the conventional wisdom and numerous published polls suggest that voters will blame Republicans more than Democrats for forcing the current deadlock. Some Republicans have suggested it is not worth paying a political price to try to block a law they do not see another way to head off. Other Republicans, including me, have suggested that GOP resistance to a deeply flawed bill is ultimately counterproductive, since it gives Democrats who passed Obamacare a way to blame Republicans for the law’s shortcomings.

The prevalent Democratic thinking is that public pressure will force House Republicans to cave, as they believe occurred in 1996. I am not so sure their logic will stand up.

The country today is more polarized than it was in 1996, and congressional districts are much more partisan. House Republicans are much more likely to lose their seats due to a primary defeat than due to losing a general election next year. In districts where Obamacare is highly unpopular, which are also the districts that elect most House Republicans, the best way to lose a primary is probably to be insufficiently aggressive in fighting the health care law, not to be too obstinate in opposing it.

Moreover, most of the country will barely notice the partial shutdown, just as most of the country – contrary to Democratic predictions of doom – barely noticed the budget sequester earlier this year. The exceptions, and victims, are primarily federal employees whose personal finances are badly disrupted. Some of those employees are Republicans, of course, but it is probably safe to say that most aren’t. The longer Democrats allow the shutdown to persist, the more they hurt a sizeable number of their own constituents.

Finally, there is the bigger battle to come over raising the federal borrowing limit. Obama and his fellow Democrats insist that failure to raise the limit would automatically result in “default,” which to financial types means a failure by the government to honor its debt obligations. The politicians, however, use “default” merely to indicate that the government would be unable to pay all its bills. They are absolutely right about the latter, but not about the former.

Failing to raise the borrowing limit would be tantamount to having to balance the federal budget, instantly. It will inevitably be hugely disruptive and would likely hurt the economy. But it would also stop the government from going more deeply into debt.

That is a goal for a considerable number of Republicans but for few – if any – Democrats in Washington.

So the longer the deadlock persists and the longer the shutdown drags on, the more pressure Democrats will feel to end it. I would expect their denunciations of Republicans to become increasingly shrill. But if the GOP hangs on, within a few weeks Democrats will likely be forced to expand their political vocabulary.

Just saying “no” is unlikely to be the way to ultimately get to “yes.”

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About Larry M. Elkin 564 Articles

Affiliation: Palisades Hudson Financial Group

Larry M. Elkin, CPA, CFP®, has provided personal financial and tax counseling to a sophisticated client base since 1986. After six years with Arthur Andersen, where he was a senior manager for personal financial planning and family wealth planning, he founded his own firm in Hastings on Hudson, New York in 1992. That firm grew steadily and became the Palisades Hudson organization, which moved to Scarsdale, New York in 2002. The firm expanded to Fort Lauderdale, Florida, in 2005, and to Atlanta, Georgia, in 2008.

Larry received his B.A. in journalism from the University of Montana in 1978, and his M.B.A. in accounting from New York University in 1986. Larry was a reporter and editor for The Associated Press from 1978 to 1986. He covered government, business and legal affairs for the wire service, with assignments in Helena, Montana; Albany, New York; Washington, D.C.; and New York City’s federal courts in Brooklyn and Manhattan.

Larry established the organization’s investment advisory business, which now manages more than $800 million, in 1997. As president of Palisades Hudson, Larry maintains individual professional relationships with many of the firm’s clients, who reside in more than 25 states from Maine to California as well as in several foreign countries. He is the author of Financial Self-Defense for Unmarried Couples (Currency Doubleday, 1995), which was the first comprehensive financial planning guide for unmarried couples. He also is the editor and publisher of Sentinel, a quarterly newsletter on personal financial planning.

Larry has written many Sentinel articles, including several that anticipated future events. In “The Economic Case Against Tobacco Stocks” (February 1995), he forecast that litigation losses would eventually undermine cigarette manufacturers’ financial position. He concluded in “Is This the Beginning Of The End?” (May 1998) that there was a better-than-even chance that estate taxes would be repealed by 2010, three years before Congress enacted legislation to repeal the tax in 2010. In “IRS Takes A Shot At Split-Dollar Life” (June 1996), Larry predicted that the IRS would be able to treat split dollar arrangements as below-market loans, which came to pass with new rules issued by the Service in 2001 and 2002.

More recently, Larry has addressed the causes and consequences of the “Panic of 2008″ in his Sentinel articles. In “Have We Learned Our Lending Lesson At Last” (October 2007) and “Mortgage Lending Lessons Remain Unlearned” (October 2008), Larry questioned whether or not America has learned any lessons from the savings and loan crisis of the 1980s. In addition, he offered some practical changes that should have been made to amend the situation. In “Take Advantage Of The Panic Of 2008” (January 2009), Larry offered ways to capitalize on the wealth of opportunity that the panic presented.

Larry served as president of the Estate Planning Council of New York City, Inc., in 2005-2006. In 2009 the Council presented Larry with its first-ever Lifetime Achievement Award, citing his service to the organization and “his tireless efforts in promoting our industry by word and by personal example as a consummate estate planning professional.” He is regularly interviewed by national and regional publications, and has made nearly 100 radio and television appearances.

Visit: Palisades Hudson

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